BUSINESS CHAPTER 19 Flashcards
What are security markets
financial marketplaces for stocks and bonds. they serve 2 primary functions
What are the 2 primary functions of security markets
-assist businesses in finding long-term funding to finance capital needs
-provide investors a place to buy and sell securities such as stocks and bonds
primary markets
handle the sale of new securities
secondary markets
handle the trading of securities between investors, with the proceeds of the sale going to the seller
initial public offering (IPO)
the first public offering of a corporation’s stock
investment bankers
specialists who assist in the issue and sale of new securities
institutional investors
large organizations, such as pension funds or mutual funds, that invest their own funds or the funds of others
stock exchange
an organization whose members can buy and sell (exchange) securities for companies and investors
over-the-counter (OTC) market
exchange that provides a means to trade stocks not listed on the national exchanges
NASDAQ
a nationwide electronic system that communicates over-the-counter trades to brokers
Securities and Exchange Commission (SEC)
Federal agency that has
responsibility for regulating the various exchanges
Prospectus
A condensed version of economic and financial information that a
company must file with the SEC before issuing stock; the prospectus must be sent to prospective investors
Stocks
Shares of ownership in a company.
Stock certificate
Evidence of stock ownership that specifies the name of the company, the number of shares it represents, and the type of stock being issued.
Dividends
Part of a firm’s profits that the firm may distribute to stockholders as either cash
payments or additional shares of stock.
advantages of issuing stock
-Stockholders are owners of a firm and never have to be repaid their investment
-there is no legal obligation to pay dividends
-issuing stock can improve a firm’s balance sheet since stock creates no debt.
Disadvantages of Issuing Stock
-Stockholders have the right to vote for a company’s board of directors. Issuing new
shares of stock can thus alter the control of the firm.
-Dividends are paid from after-tax profits and are not tax-deductible.
-The need to keep stockholders happy can affect managers’ decisions.
Common stock
The most basic form of ownership in a firm; it confers voting
rights and the right to share in the firm’s profits through dividends
preferred stock
Stock that gives its owners preference in the payment of dividends and an earlier claim on assets than common stockholders.
Preferred stock can also be
-callable
-convertible
-cumulative
Bond
A corporate certificate indicating that a person has lent money to a firm
Principal
The face value of the bond
Maturity date
The exact date the issuer of a bond must pay the principal to the
bondholder
interest
The payment the issuer makes to the bondholders for use of the
borrowed money
advantages of issue bonding
bondholders are creditors, not owners, of the firms and cannot vote on corporate matters
-bond interest is tax-deductible
-bonds are a temporary source of funding and are eventually repaid
-bonds can be repaid before the maturity date if they are callable
disadvantages of issuing bonds
-bonds increase debt and can affect the market’s perception of the firm
-paying interest on bonds i a legal obligation. if interest is not paid, bondholders can take legal action
-The face value of the bond must be repaid on the maturity date.
Unsecured bonds (debenture bonds
are not backed by specific collateral.
Sinking fund
Reserve account in which the issuer periodically retires some part
of the bond principal prior to maturity so that enough capital will be accumulated
by the maturity date.
Callable bonds
permit bond issuers to pay off the principal before the maturity
date.
Convertible bonds
allow bondholders to convert their bonds into shares of common stock
Stockbroker
A registered representative who works as a market intermediary to buy and sell securities for clients.
consider these five criteria when selecting investment options
-investment risk
-yield
-duration
-liquidity
-tax consequences
Diversification
Buying several different investment alternatives to spread the risk of investing
if diversifying, an investor may put
-25 percent of his or her money into U.S growth stocks
-25 percent in government bonds
-25 percent in divided-paying stocks
-10 percent in a international mutual fund
-the rest in a savings account
Bulls
Investors who believe stock prices are going to rise
Bears
Investors who expect stock prices to decline
Capital gains
The positive difference between purchase price of a stock and its sale price.
investors can also choose stocks according to their strategy:
- Blue-chip stocks
- Growth stocks
- Income stocks
- Penny stocks
Stock splits
An action by a company that gives stockholders two or more shares of stock for each one they own
Buying stock on margin
Purchasing stocks by borrowing some of the purchase cost from the brokerage firm
information in a quote includes:
- Highest and lowest price for that day
- High and low over the past 52 weeks
- Dividend paid
- Dividend yield
- Ratios such as price/earnings ratio
- Earnings per share
- Number of shares traded
Junk bonds
High-risk, high-interest bonds
Mutual fund
An organization that buys stocks and bonds and then sells shares in those
securities to the public
Exchange-traded funds (ETFs)
Collections of stocks that are traded on exchanges but are traded more like individual stocks than like mutual funds
Dow Jones Industrial Average (the Dow)
The average cost of 30 selected industrial stocks,
used to give an indication of the direction of the stock market over time
Program trading
Giving instructions to computers to automatically sell if the price of a stock dips to a certain point to avoid potential losses.
